Long World Championship matches and normal tournaments are two very different beasts. Kramnik [convincingly] defeated Kasparov for the world championship in 2000, yet Kasparov was still the indisputably strongest tournament player in the world, and would remain so for the entirety of Kramnik's 6 year reign. Magnus' recent title defenses, except against Ian, have not been convincing. And against Ian, he was largely gifted games after Ian lost one good game and then went on monkey tilt. In the 2 world championship matches prior, Magnus had a grand score of +1 =22 -1. Magnus is dominant in regular tournaments, but that level of dominance has not carried over into his world championship matches.
I think he simply wanted to go out undefeated. The only opponent Magnus was willing to defend his title against is Alireza, the 4th in the world behind Magnus, Ian, and Ding. But he is by far the least experienced. He has 0 classical match experience against top players, is 20 years old, and also has tilt issues. Throw in the pressure of a World Championship match and he would almost certainly have been the easiest opponent for Magnus.
This event showed who the strongest match player in the world is, and as of today - that is Ding Liren.
He was undefeated for 10 years and you're rationalizing that he somehow isn't the best player because some other guy once lost in this format? And his undefeated streak over 10 years wasn't convincing enough for you?
That "some other guy" was the undefeated world champion for 15 years, the world #1 player for 21 years, and more. He was much more dominant than even Magnus. Yet it was a similar story for him where his match dominance ended well before his tournament dominance did. Even after losing the world championship title, he would remain world #1 for about 6 more years.
Maintaining dominance against a peer (and their team) who spend the better part of a year doing nothing but preparing for you, is very different than maintaining it in the relatively far more casual environment of tournaments. And there's a big ego trap here. Quitting is easy, especially when you're on top. Continuing to fight until the day you fall is hard, and requires immense character.
You have to consider match vs tournament play. The two are really very different. In tournaments you're playing a small number of games against a large number of different opponents, of often dramatically different skill levels. The large number of players also often also all but guarantees that some of the players will be off form, and easy pickings for the rest of the crowd. It's a really fun and interesting dynamic but very different than match play.
For the world championship players spend the better part of a year, generally with a large team of other world class players, intensely preparing to play games against only a single player, studying their games, and finally unleashing absolutely everything they've discovered. And then there's a constant metagame knowing each game you play one day will be deeply studied by your opponent and his team, and he will come back fully prepared the next day.
Carlsen gave up his title because he no longer wanted to put the massive amounts of work in that are required to maintain it. Would he be the best match player if he started putting this work in again? Maybe? But he's chosen not to do that.
I genuinely think Ding could beat Magnus is the WCC 14 game format. Magnus does better on tournaments but 14 games against the same player is a different beast and while Magnus has performed well in the past he has also shown plenty of weaknesses in the format.
As Magnus noted in his reasons for stepping down from the match, your first sentence is entirely correct. The 1v1 format of the world championship makes it largely a battle of opponent-specific prep. For a round robin, players generally play their strongest lines and prepare for their opponents' likely responses. For the championship, each player is trying to prepare surprises for the other, and it's largely a battle of who can get their opponent out of prep most effectively without sacrificing advantage, and how effectively you play when out of prep.
I think he simply wanted to go out undefeated. The only opponent Magnus was willing to defend his title against is Alireza, the 4th in the world behind Magnus, Ian, and Ding. But he is by far the least experienced. He has 0 classical match experience against top players, is 20 years old, and also has tilt issues. Throw in the pressure of a World Championship match and he would almost certainly have been the easiest opponent for Magnus.
This event showed who the strongest match player in the world is, and as of today - that is Ding Liren.